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Post-Lockdown New Normal: Many Brick & Mortar Stores Will Not Reopen, CMBS will Default, Mess to Ensue

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Via Wolf Street

Neither the Fed nor the Treasury can bail out brick-and-mortar retailers.

By Wolf Richter for WOLF STREET:

Macy’s announced today that it would lay off “the majority” of its 123,000 employees after it had closed all its Macy’s, Bloomingdale’s and Bluemercury stores on March 18. Even before the lockdowns, its headcount was already down 17% from four years ago, in line with the decline of its brick-and-mortar operations. It said these stores would “remain closed until we have clear line of sight on when it is safe to reopen.”

Whenever that may be. But “at least through May,” the furloughed employees who were already enrolled in its health benefits program “will continue to receive coverage with the company covering 100% of the premium.” And it said, “We expect to bring colleagues back on a staggered basis as business resumes.” That is, if business at these brick-and-mortar stores resumes.

Department stores have been on a 20-year downward spiral that has ended for many of them in bankruptcy court where they got dismembered and sold off in pieces. The survivors, which have been shuttering their brick-and-mortar stores for years, are now getting hit by the lockdowns.

The chart depicts the brick-and-mortar business that Macy’s, Nordstrom, Kohl’s, JCPenney, Neiman Marcus, Sears, Bon-Ton Stores, Barney’s and others are in – or were in. Over the past 20 years, department store revenues declined by 43%. And now they’re getting whacked for good by the lockdowns. That declining line of revenues is going to make a 90-degree downward kink in Q1, Q2 and Q3, to violate the WOLF STREET beer-bug dictum that “Nothing Goes to Heck in a Straight Line”:

Macy’s said today that its online sales would continue. Its online sales in 2019 were already 26% of its total sales, according to its annual report. According to eMarketer, Macy’s ecommerce business made it the seventh largest ecommerce retailer in the US in 2019:

  1. Amazon
  2. eBay
  3. Walmart
  4. Apple
  5. Home Depot
  6. Best Buy
  7. Macy’s
  8. Qurate Retail Group (QVC, HSN, Zulily, Ballard Designs, Frontgate, Garnet Hill, and Grandin Road)
  9. Costco
  10. Wayfair
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As many brick-and-mortar stores have shut down, and as people are fearful about going to those stores that are still open (such as grocery stores), ecommerce sales have exploded. Americans have long been reluctant to buy groceries online. But that has changed overnight.

Amazon, Walmart and other online retailers have gone on a hiring binge to deal with the onslaught of online buying, including the stuff people normally bought in grocery stores. Online retail is the huge winner of COVID-19. When the Q1 and Q2 ecommerce revenues emerge, we will see a historic spike in online sales even as brick-and-mortar sales went straight to heck.

During the lockdown, even Macy’s remaining hard-core brick-and-mortar customers are going to get used to shopping online. And when the lockdowns are over, there won’t be a return to the “old normal.” It will be a New Normal in which Macy’s brick-and-mortar stores are largely irrelevant.

All major department store chains and many shopping malls have shut down. Hundreds of thousands of employees have gotten laid off as retailers are trying to figure out where to go from here. And they’re now pushing online to the max – because for them, that’s the only thing there is.

More department stores have moseyed over to the bankruptcy-filing counter, including JCPenney and Neiman Marcus. All their stores are closed. And ecommerce isn’t going to suffice for them. Neiman Marcus is reportedly already in talks with creditors about filing for bankruptcy.

How many of these department stores and apparel stores will even reopen after the lockdown?

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That stimulus money being handed out by the truckload – and the retailers will gladly take what they can get – will do nothing to make brick-and-mortar department stores viable in the post-lockdown New Normal.

There is a good chance that Macy’s, Kohl’s, JCPenney Neiman Marcus, and others will use the lockdowns as reason to not even reopen certain stores afterwards, and that there will be a pandemic of closed stores that remain closed after the lockdowns are over. COVID-19 will speed up the inevitable process by a bunch of years.

It’s going to be a financial mess.

Stores are going to negotiate with landlords about not paying their rents, or just refuse to pay their rents, while their stores are under lockdown. Landlords are going to check out government-encouraged offers of forbearance from lenders or servicers to see if they can skip some mortgage payments since their tenants skipped lease payments. Many of those loans have been packaged into commercial mortgage-backed securities (CMBS), and those CMBS are now facing default. And this is where it gets messy.

When a CMBS loan defaults – or even when the loan hasn’t defaulted yet but when a mall backing a CMBS loses an anchor tenant, such as a department store – servicing gets switched from the master servicer to a “special servicer.” This is laid out in the pooling and servicing agreement (PSA). The special servicer’s job is to determine if the borrower can become current through a loan modification or a debt workout. Under many PSAs, a special servicer has the right to purchase the property at a discount if that same special servicer decides the loan cannot be brought current. Even under normal circumstances, this invites self-dealing.

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Retail-exposed CMBS have already been defaulting across the country. Now, this is likely to happen on a large scale. Which is one of the reasons the CMBS market is in such turmoil, and why S&P began slashing the credit ratings of many CMBS with retail exposure, some of them by multiple notches, including one deal by nine notches. And this is why the Fed and the Treasury and the Primary Dealers are now conspiring to bail out the CMBS market.

But they cannot do a thing about the underlying dynamics – the previously gradual and now sudden shift to ecommerce.

Those retailers will close their brick-and-mortar stores no matter how many bailout-trillions are being doled out. The retailers will default on their leases, the mall mortgages will default, and the CMBS will default – no matter what the Fed does.

Many of these malls or stores can eventually be torn down and redeveloped into a mixed-use high rise or whatever; but this will be by and for new investors. And it won’t be of any benefit to the holders of the defaulted CMBS.

Just astounding. So many downgrades in just of a couple of days. And zero upgrades. Here’s who got hit over the past couple of days. Read... The Downgrade Massacre Has Started

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